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They probably do it because dividends are seen as somewhat obsolete, but firms have to continue paying them because they set a precedent. They are small because

They probably do it because dividends are seen as somewhat obsolete, but firms have to continue paying them because they set a precedent. They are small because they have to be consistent or investors freak out, so the actual earnings aren't distributed anyway. I'd personally rather not have dividends for several reasons: 1. the stock price should accurately reflect the earnings of the firm. When a dividend is announced, the price of the stock decreases by the amount of the dividend. If you want some of those earnings, then sell a share. There's no need for the company to issue a dividend. This is a common misconception most people have. 2. You're taxed on the dividend payments (exceptions tax deferred retirement accounts). This is annoying, especially if you don't want them now and would rather have them just reinvested. Ignoring taxes, the value to the shareholder is the same regardless of whether dividends are paid or not. My professors in finance all go on long rants against paying dividends, and it really does seem that they're antiquated. Most newer firms just don't pay dividends, and tech companies just happen to be newer firms usually. It's not necessary a property of just tech companies.

tocomment 17y ago
If a stock doesn't pay dividends it's just a glorified baseball card.
alanthonyc 17y ago
"dividends are obsolete" sound to me like another form of "it's different this time." I don't believe that. The purpose of a company is to make money for its owners. Dividends are payments to the owners of the money the company makes. As far as capital gains goes, that is just a side-effect (albeit, a potentially lucrative one).
- ingenium 17y ago
  I fail to see your argument. The owners make money without receiving dividends. It's reflected in the stock price. When a dividend is issued, the stock price goes down by exactly that amount. It's the exact same thing. If you want that money, sell the stock. My argument is that from a tax perspective, it's more beneficial for the owners for the company to NOT pay dividends. If you ignore taxes, they're identical. Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. The investors/owners still have $100 whether the dividend is issued or not, except the investors have to pay taxes on that 50 cent dividend now instead of having it re-invested.
  - SapphireSun 17y ago
    In that case, you're selling your ownership in the company in order to make money. Dividends pay their owners without attenuating their voting power. This might now be very useful in the modern marketplace, but from a historical perspective, and from a small business perspective, they are VERY useful.
  - dschobel 17y ago
    That's a very one-dimensional view of investing though. The Bogle (the founder of Vanguard) school of investing says that investing in the hopes the price will go up or down is nothing but speculation on the same level as investing in commodities (a barrel of oil does not do anything, it just sits there and is worth what the market says it is worth). This traditional view holds that companies are fundamentally different than barrels of oil, in that they can produce wealth and provide reasonable returns to their share-holders year after year and that you can take your 7% appreciation at the rate the economy grows (or at least used to). Timing the market is certainly a valid (if highly risky) strategy, but it's only one view of investing. It's only in this strategy which dividends don't make sense.
  - alanthonyc 17y ago
    "Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. " That statement is patently incorrect, in theory and in practice. PRACTICE The share price of companies that announce dividends every quarter has little immediate correlation to the dividend announced. In the long term, companies that consistently raise dividends year over year actually increase in value. (These are affectionately referenced as "dividend darlings" and are a focus of some investment strategies.) THEORY The purpose of a company is to make money. You do this by spending capital to create a product. Once you sell that product, you regain back the capital you invested in earnings. The goal is to eventually make back more money in earnings than what you invested in capital. If I buy a bar in my neighborhood for, say, $100k, I would expect to make money back on it. If I worked hard to build a clientele and earned something like $30k a year from my customers (a spectacular return, by the way), then the bar would be earning money. I could then afford to pay some of that out to the shareholders - in this case, just me. What your notion of dividends seems to be is a cannibalization of the equity present in the company. If the company has no product of intrinsic value, then yes, your example might hold true. In the bar example, you would believe that the bar is worth only $100k (the price I paid) and that any money I pay out would be coming out of that $100k. This would be true only if I did not work to get customers and therefore did not make any money over the year. SUMMARY For companies that provide value in the form of goods and services, the money you get out of it will be more than the money you put in. This frequently, and oftentimes should, take the form of dividend payments. ALTERNATIVE Having said all that, there are very legitimate reasons why tech companies do not pay out dividends, namely that they reinvest the profits in research and development to produce new and better products. I don't think anyone who bought Apple stock seven years ago is complaining about the lack.
- rms 17y ago
  pragmatism vs. idealism, etc. etc.

tocomment 17y ago

If a stock doesn't pay dividends it's just a glorified baseball card.

alanthonyc 17y ago

"dividends are obsolete" sound to me like another form of "it's different this time." I don't believe that. The purpose of a company is to make money for its owners. Dividends are payments to the owners of the money the company makes. As far as capital gains goes, that is just a side-effect (albeit, a potentially lucrative one).

ingenium 17y ago
I fail to see your argument. The owners make money without receiving dividends. It's reflected in the stock price. When a dividend is issued, the stock price goes down by exactly that amount. It's the exact same thing. If you want that money, sell the stock. My argument is that from a tax perspective, it's more beneficial for the owners for the company to NOT pay dividends. If you ignore taxes, they're identical. Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. The investors/owners still have $100 whether the dividend is issued or not, except the investors have to pay taxes on that 50 cent dividend now instead of having it re-invested.
- SapphireSun 17y ago
  In that case, you're selling your ownership in the company in order to make money. Dividends pay their owners without attenuating their voting power. This might now be very useful in the modern marketplace, but from a historical perspective, and from a small business perspective, they are VERY useful.
- dschobel 17y ago
  That's a very one-dimensional view of investing though. The Bogle (the founder of Vanguard) school of investing says that investing in the hopes the price will go up or down is nothing but speculation on the same level as investing in commodities (a barrel of oil does not do anything, it just sits there and is worth what the market says it is worth). This traditional view holds that companies are fundamentally different than barrels of oil, in that they can produce wealth and provide reasonable returns to their share-holders year after year and that you can take your 7% appreciation at the rate the economy grows (or at least used to). Timing the market is certainly a valid (if highly risky) strategy, but it's only one view of investing. It's only in this strategy which dividends don't make sense.
- alanthonyc 17y ago
  "Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. " That statement is patently incorrect, in theory and in practice. PRACTICE The share price of companies that announce dividends every quarter has little immediate correlation to the dividend announced. In the long term, companies that consistently raise dividends year over year actually increase in value. (These are affectionately referenced as "dividend darlings" and are a focus of some investment strategies.) THEORY The purpose of a company is to make money. You do this by spending capital to create a product. Once you sell that product, you regain back the capital you invested in earnings. The goal is to eventually make back more money in earnings than what you invested in capital. If I buy a bar in my neighborhood for, say, $100k, I would expect to make money back on it. If I worked hard to build a clientele and earned something like $30k a year from my customers (a spectacular return, by the way), then the bar would be earning money. I could then afford to pay some of that out to the shareholders - in this case, just me. What your notion of dividends seems to be is a cannibalization of the equity present in the company. If the company has no product of intrinsic value, then yes, your example might hold true. In the bar example, you would believe that the bar is worth only $100k (the price I paid) and that any money I pay out would be coming out of that $100k. This would be true only if I did not work to get customers and therefore did not make any money over the year. SUMMARY For companies that provide value in the form of goods and services, the money you get out of it will be more than the money you put in. This frequently, and oftentimes should, take the form of dividend payments. ALTERNATIVE Having said all that, there are very legitimate reasons why tech companies do not pay out dividends, namely that they reinvest the profits in research and development to produce new and better products. I don't think anyone who bought Apple stock seven years ago is complaining about the lack.
rms 17y ago
pragmatism vs. idealism, etc. etc.